Thursday 17 May 2012 16.00 EDT
First published on Thursday 17 May 2012 16.00 EDT

In the recent elections in Greece and France, voters voted loudly for politicians who argue that with record levels of unemployment, poverty and despair, only a growth plan will prevent Europe disintegrating politically, economically and socially.

The new emphasis on "growth" is due to the failure of austerity, in all countries, to kickstart a post-crisis recovery (or even reduce debt levels), and the failure of quantitative easing in achieving much but bailing out the banks that are now rich enough to start speculating again. Healthy banks in a sick economy: a bad mix. Yet this new emphasis on growth is hardly a consensus.

Economists, since the time of Adam Smith's 1776 work, Wealth of Nations, have debated what causes growth. Indeed, some economists have long insisted that growth occurs precisely through thrift – that is, austerity. And in recent weeks we have heard many economists argue that growth in the eurozone will come from "structural reforms" that will make it easier to collect taxes, reduce red tape, and easier to hire and fire workers.

But growth requires investment. Companies invest to make profits and grow. Evidence shows those which invest more in new technology, human capital and research and development, and are located in countries where public spending in these areas is high, are able to produce more competitive and better value products.

Italy has not grown for the last 10 years, mainly because its public and private sector did not make key investments in factors that increase productivity. Its debt-to-GDP ratio rose because its growth rate was so much lower than the interest it paid on its debt. And Greece grew in the 90s not because it was making smart investments but because badly directed European structural funds allowed it to get away with not making them. Once those funds expired, so did the false growth.

And structural reforms without investment don't produce growth. When Telecom Italia was privatised in 1997 (to spur growth) it cut its research and development spending, and is now much less innovative and competitive than France Télécom, which remained partly public and continued to invest. Scandinavia, with its large welfare state and stringent labour laws, has been one of the most crisis-resilient regions because it invests in innovation.

Yet through its moralistic and deflationary stance of "do what the Germans did", pressure from Germany is not allowing the weaker eurozone countries to do just that. German competitiveness is not due only to its lower unit labour costs (which are not low when welfare benefits are included), but to its strategic investments in research and development, vocational training, state investment banks that create "patient" finance, and its recent emphasis on greening the economy. Similarly, the engineering group Siemens did not win a UK contract for fast green trains because of low wages, but because of its innovation investments, which have made it one of the most competitive companies in the world.

The eurozone will grow only once weaker countries are allowed to make the strategic investments Germany has. There is much talk about the need for internal rebalancing, to increase the competitiveness of the deficit-burdened south relative to the surplus-blessed north, but this is a limited view. What is required is not that wages fall in Portugal, Italy, Greece, and Spain, but that they make investments that increase their productivity – an impossibility with austerity-driven policies.

And the lack of these investments only makes Germany more competitive relative to its southern neighbours – but without a strong EU, Germany will not be able to compete with China and Brazil in emerging sectors and technologies.

A critical player, the European Investment Bank, could encourage productive investments across Europe, generating a real rebalancing. The EIB could become the financial arm of what should be, but is not, Europe's equivalent of the American Recovery and Reinvestment Act. Applying the principle of the "Keynesian multiplier", the current proposal is to increase its capital by a modest €10bn, unleashing €60bn in co-financing projects which will then (hopefully) multiply to as much as €180bn of European Union output.

But to render this a systematic mechanism for European economic solidarity, more is needed. Under the present law, EIB investments need to be co-financed by member states; and the weaker ones have no cash for this. Only if European Central Bank bonds can co-finance EIB bonds – which Germany resists – will EIB investments allow Greece, for instance, to grow through investment in renewables, putting its sunshine to better use than just tourism. And, in the process, create the desperately needed dynamic "spillovers" in technology, research, education, and training.

So if growth is really on the agenda, the focus should be on the productive investments needed to rebalance Europe, and mechanisms that allow that to happen. It is far too easy for David Cameron to say "get your house in order" and then work against such mechanisms. The eurozone will rise when new economic thinking wins over static ideology.